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Charles T. Munger: Poor Charlie’s Almanack Part 1 Book Summary

By Michael George Knight — 6 years ago

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PART 1 OF 3

The Key Points of Poor Charlie’s Almanack

  • Strive to be objective. Force yourself to consider arguments on the other side, and argue them better than the other side can. Learn to handle mistakes. Be OK with being wrong. Seek to destroy your favorite ideas.
  • Invert, always invert. Turn a situation around. How can you best destroy your own life right now? How can your company best fail if that were your aim? Then invert the answer to find what to do.
  • Be interdisciplinary. Take the best ideas from the major fields. This avoids “man with a hammer” syndrome where you have one hammer and everything looks like a nail.
  • Build a latticework of mental models to understand phenomena. Mental models include psychological biases, opportunity cost, autocatalysis.
  • Know your circle of competence. If you’re outside of it, wait and learn more before acting.
  • To succeed in investing, don’t make a lot of bets. Because of pari mutuel, it’s hard to tell whether something is a great deal immediately. Wait to find great deals, then bet huge.
  • Learn vicariously from other people’s mistakes, rather than make them yourself.
  • Our brains are faulty. Use checklists to analyze decisions and recognize biases.
  • Remember the exercise of how to build a trillion dollar company. Be able to explain the success of a company from first principle, using major mental models, inversion, psychological biases. This will help you avoid mistakes that undo your work.

 

On Rationality and Decision Making

When asked to describe himself in one word, Charlie Munger chose “rational.” He knows he’s subject to the same biases affecting all other humans, and he’s trained himself to recognize when they’re active and how to limit their damage.

 

Objectivity and Changing One’s Mind

Poor Charlie’s Almanack resurfaces the necessity of recognizing the truth in the world, not what you want to believe.

  • “I think that one should recognize reality even when one doesn’t like it; indeed, especially when one doesn’t like it.”
  • “Faced with one’s the mind choice and between proving there is no need to do so, almost everyone gets busy on the proof.”
  • “Any year that you don’t destroy one of your best-loved ideas is probably a wasted year.”
  • “It’s bad to have an opinion you’re proud of if you can’t state the arguments for the other side better than your opponents. This is a great mental discipline.”
  • “We all are learning, modifying, or destroying ideas all the time. Rapid destruction of your ideas when the time is right is one of the most valuable qualities you can acquire. You must force yourself to consider arguments on the other side.”
  • “Never fool yourself, and remember that you are the easiest person to fool.” – Richard Feynman
  • “Apply logic to help avoid fooling yourself. Charlie will not accept anything I say just because I say it, although most of the world will.” – Warren Buffett
  • “How many legs does a dog have if you call the tail a leg? Four. Calling a tail a leg doesn’t make it a leg.” – Abraham Lincoln
  • “Most people early achieve and later intensify a tendency to process new and disconfirming information so that any original conclusion remains intact. They become people of whom Philip Wylie observed: “You couldn’t squeeze a dime between what they already know and what they will never learn.”
  • “Both Warren and I are very good at changing our prior conclusions. We work at developing that facility because, without it, disaster often comes.”
  • “If people tell you what you really don’t want to hear—what’s unpleasant—there’s an almost automatic reaction of antipathy. You have to train yourself out of it. It isn’t foredestined that you have to be this way. But you will tend to be this way if you don’t think about it.”
    • “[CBS head] Paley was a god. But he didn’t like to hear what he didn’t like to hear, and people soon learned that. So they told Paley only what he liked to hear. Therefore, he was soon living in a little cocoon of unreality and everything else was corrupt.”
  • “One trick in life is to get so you can handle mistakes. Failure to handle psychological denial is a common way for people to go broke. You’ve made an enormous commitment to something. You’ve poured effort and money in. And the more you put in, the more that the whole consistency principle makes you think, “Now it has to work. If I put in just a little more, then it’ll work.”
  • “Deprival super-reaction syndrome also comes in: You’re going to lose the whole thing if you don’t put in a little more. People go broke that way—because they can’t stop, rethink, and say, “I can afford to write this one off and live to fight again. I don’t have to pursue this thing as an obsession—in a way that will break me.””
  • “A new scientific truth does not triumph by convincing its opponents and making them see the light, but rather because its opponents eventually die, and a new generation grows up that is familiar with it.” – Max Planck
  • “Truth is hard to assimilate in any mind when opposed by interest.” Be aware of your own and others’ incentive-caused biases.
  • “What a man wishes, he will believe.” – Demosthenes
  • Avoid intense ideologies. “When you announce that you’re a loyal member of some cult-like group and you start shouting out the orthodox ideology, what you’re doing is pounding it in, pounding it in, pounding it in. You’re ruining your mind, sometimes with startling speed. So you want to be very careful with intense ideology.”
  • “I feel that I’m not entitled to have an opinion unless I can state the arguments against my position better than the people who are in opposition.”

 

Divergence and Contrary Thinking

Charlie Munger thinks social proof causes humans to think like sheep, so contrary thinking invites new ideas that are possibly more objectively correct. Here are the best quotes from Poor Charlie’s Almanack on innovative thinking:

  • “Mimicking the herd invites regression to the mean.”
  • Given Charlie’s record of success, not to mention Buffett’s endorsement, why aren’t his investment practices more routinely emulated by others? Perhaps the answer is that, for most people, Charlie’s multidisciplinary approach is simply too hard. Further, few investors share Charlie’s willingness to appear foolish by not following “the herd.”
  • “Anyone has to be flabbergasted by Japan’s recession, which has endured for ten years, despite interest rates below one percent. The government is playing all the monetary games, but it’s not working. If you had described this situation to Harvard economists, they would have said it’s impossible. Yet at the same time, there’s an asset bubble in Hong Kong. Why? Because Japan and China are two vastly different cultures. The Chinese are gamblers. This is a classic example of why, to be a successful investor, one must draw from many disciplines. Imagine an economist standing up at a meeting of economists and giving my explanation. It wouldn’t be politically correct! But the tools of economics don’t explain what’s going on.”
  • “Crowd folly,” the tendency of humans, under some circumstances, to resemble lemmings, explains much foolish thinking of brilliant men and much foolish behavior – like investment management practices of many foundations represented here today. It is sad that today each institutional investor apparently fears most of all that its investment practices will be different from practices of the rest of the crowd.”
  • As one small example, Charlie bought a tennis ball practice machine and practiced volleys endlessly. Much like golf short game, which is tedious and no one really likes practicing, mastering volleys gave him a competitive advantage.

 

Invert, Always Invert

Charlie mentions this tool often in Poor Charlie’s Almanack, and it’s an effective tool. Look at your problem from the opposite perspective, and it may reveal new insights.

  • “What’s the flip side? What can go wrong that I haven’t seen?”
  • “Invert, always invert. Many hard problems are best solved only when they are addressed backwards.”
    • “For instance, when almost everyone else was trying to revise the electromagnetic laws of Maxwell to be consistent with the motion laws of Newton, Einstein discovered special relativity as he made a 180- degree turn and revised Newton’s laws to fit Maxwell’s.”
  • “Well, great declarers in bridge think, “How can I take the necessary winners?” But they think it through backwards, [too. They also think,] “What could possibly go wrong that could cause me to have too many losers?”
  • “If you want to help India, the question you should consider asking is not: “How can I help India?” Instead, you should ask: “How can I hurt India?” You find what will do the worst damage, and then try to avoid it.”

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Circle of Competence

Charlie Munger and Warren Buffett know what they’re good at, and what they’re bad at. (He explains in Poor Charlie’s Almanack why Berkshire Hathaway doesn’t invest in technology companies.) Don’t get overconfident and subject to the Twaddle tendency where you think you know a lot more than you do – this can cause terrible mistakes.

  • “Knowing what you don’t know is more useful than being brilliant.”
  • “People are trying to be smart—all I am trying to do is not to be idiotic, but it’s harder than most people think.”
  • “You have to figure out what your own aptitudes are. If you play games where other people have the aptitudes and you don’t, you are going to lose.”
  • “We try more to profit from always remembering the obvious than from grasping the esoteric. It is remarkable how much long-term advantage people like us have gotten by trying to be consistently not stupid, instead of trying to be very intelligent.”
  • “We have three baskets for investing: yes, no, and too tough to understand.” To identify potential “yes” candidates, Charlie looks for an easy to understand, dominant business franchise that can sustain itself and thrive in all market environments. Understandably, few companies survive this first cut. Many investor favorites such as pharmaceuticals and technology, for example, go straight to the “too tough to understand” basket. Heavily promoted “deals” and IPOs earn immediate “no’s.” Those that do survive this first winnowing are subjected to the screens and filters of Charlie’s mental model approach.
  • “Warren and I don’t feel like we have any great advantage in the high-tech sector. In fact, we feel like we’re at a big disadvantage in trying to understand the nature of technical developments in software, computer chips, or what have you. So we tend to avoid that stuff, based on our personal inadequacies.”
  • On one occasion the chauffeur, who by this time knew the lecture by heart, suggested that he and Planck switch places. At the conclusion of the chauffeur’s flawless recitation of the lecture, a physicist stood up and posed a very difficult question. The chauffeur, ready for the situation, replied, “I’m surprised that a citizen of an advanced city like Munich is asking so elementary a question, so I’m going to ask my chauffeur to respond.” In the real world, it is critical to distinguish when you are “Max Planck,” and when you are the “chauffeur.” If you cannot respond legitimately to the next question, you lack true mastery and are likely outside your “Circle of Competence.”
    • “One is Planck knowledge, that of the people who really know. They’ve paid the dues, they have the aptitude. Then we’ve got chauffeur knowledge. They have learned to prattle the talk.They may have a big head of hair. They often have fine timbre in their voices. They make a big impression. But in the end what they’ve got is chauffeur knowledge masquerading as real knowledge.”
  • “It’s great to have a manager with a 160 IQ – unless he thinks it’s 180.”
  • “If you have competence, you know the edge. It wouldn’t be a competence if you didn’t know where the boundaries lie. [Asking whether you’ve passed the boundary is] a question that almost answers itself.”
  • Anecdote of bees
    • “When a bee finds nectar, it comes back and does a little dance that tells the rest of the hive, as a matter of genetic programming, which direction to go and how far. So about forty or fifty years ago, some clever scientist stuck the nectar straight up. Well, the nectar’s never straight up in the ordinary life of a bee. The nectar’s out. So the bee finds the nectar and returns to the hive. But it doesn’t have the genetic programming to do a dance that says straight up. So what does it do?
    • “Well, if it were like Jack Welch, it would just sit there. But what it actually does is to dance this incoherent dance that gums things up.And a lot of people are like that bee. They attempt to answer a question like that. And that is a huge mistake. Nobody expects you to know everything about everything. I try to get rid of people who always confidently answer questions about which they don’t have any real knowledge. To me, they’re like the bee dancing its incoherent dance. They’re just screwing up the hive.”
  • “The hedge fund known as “Long-Term Capital Management” recently collapsed through overconfidence in its highly leveraged methods, despite I.Q.’s of its principals that must have averaged 160. Smart, hardworking people aren’t exempted from professional disasters from overconfidence. Often, they just go aground in the more difficult voyages they choose, relying on their self-appraisals that they have superior talents and methods.”
  • “It is impossible to begin to learn that which one thinks one already knows.” – Epictetus

 

Discipline in Choosing Good Ideas

  • “Perhaps the most valuable result of all education is the ability to make yourself do the thing you have to do, when it ought to be done, whether you like it or not. It is the first lesson that ought to be learned and however early a man’s training begins, it is probably the last lesson that he learns thoroughly.” – Thomas Henry Huxley
  • “Ted Williams is the only baseball player who had a .400 single-season hitting record in the last seven decades. In the Science of Hitting, he explained his technique. He divided the strike zone into seventy-seven cells, each representing the size of a baseball. He would insist on swinging only at balls in his ‘best’ cells, even at the risk of striking out, because reaching for the ‘worst’ spots would seriously reduce his chances of success. As a securities investor, you can watch all sorts of business propositions in the form of security prices thrown at you all the time. For the most part, you don’t have to do a thing other than be amused. Once in a while, you will find a ‘fat pitch’ that is slow, straight, and right in the middle of your sweet spot. Then you swing hard.” – Li Lu
  • “I could improve your ultimate financial welfare by giving you a ticket with only twenty slots in it so that you had twenty punches— representing all the investments that you get to make in a lifetime. And once you’d punched through the card you couldn’t make any more investments at all. Under those rules, you’d really think carefully about what you did and you’d be forced to load up on what you’d really thought about. So you’d do so much better.” – Warren Buffett
  • “It’s not the bad ideas that do you in. it’s the good ideas. And you may say, ‘That can’t be so. That’s paradoxical.’ What he [Graham| meant was that if a thing is a bad idea, it’s hard to overdo. But where there is a good idea with a core of essential and important truth. you can’t ignore it. And then it’s so easy to overdo it.So the good ideas are a wonderful way to suffer terribly if you overdo them.”
  • “We like to make hay while the sun sets, knowing that it will surely rise again.” – Warren Buffett
  • “If you’re comfortably rich and someone else is getting richer faster than you by, for example, investing in risky stocks, so what?! Someone will always be getting richer faster than you. This is not a tragedy.” “Soros couldn’t bear to see others make money in the technology sector without him, and he got killed. It doesn’t bother us at all [that others are making money in the tech sector].”
  • On Lou Simpson and the dotcom bubble: “You can’t believe the pressure that he was under, year after year, as the world seemed to be reaping enormous gains while he, correctly, avoided the bubble altogether, staying true to fundamentals. Lou was a wonderful example in that period—intelligent, honorable, and true to his fundamentals.”

 

Learning Vicariously from Others’ Mistakes

  • “The more hard lessons you can learn vicariously, instead of from your own terrible experiences, the better off you will be.”
  • “I believe in the discipline of mastering the best that other people have ever figured out. I don’t believe in just sitting down and trying to dream it all up yourself.”
  • “I sought good judgment mostly by collecting instances of bad judgment, then pondering ways to avoid such outcomes.”

 

Ideological Bias

Ideology skews your decision making – your beliefs morph your view of reality and cause you to deny competing evidence (especially as humans are prone to avoiding contradicting themselves). Here’s a Poor Charlie’s Almanack summary of quotes:

  • [talking about how Chomsky can’t admit that language is built into our genome] ”Pinker can’t understand why Chomsky—who, again, is such a genius—takes the position that the jury’s still out about why this ability is in the human genome. Pinker, in effect, says: “Like hell, the jury is still out! The language instinct got into humans in exactly the same way that everything else got there—through Darwinian natural selection.” Well, the junior professor is clearly right—and Chomsky’s hesitation is a little daft. But if the junior professor and I are right, how has a genius like Chomsky made an obvious misjudgment? The answer’s quite clear to me—Chomsky is passionately ideological. He is an extreme egalitarian leftist who happens to be a genius. And he’s so smart that he realized that if he concedes this particular Darwinian point, the implications threaten his leftist ideology. So he naturally has his conclusion affected by his ideological bias.”
  • “Ideology does some strange things and distorts cognition terribly. If you get a lot of heavy ideology young—and then you start expressing it—you are really locking your brain into a very unfortunate pattern. And you are going to distort your general cognition.”
  • “You can have heavy ideology in favor of accuracy, diligence, and objectivity. But a heavy ideology that makes you absolutely sure that the minimum wage should be raised or that it shouldn’t—and it’s kind of a holy construct where you know you’re right—makes you a bit nuts.”
  • “Maximizing non-egality will often work wonders. John Wooden of UCLA presented an instructive example when he was the number one basketball coach in the world. He said to the bottom 5 players, “You don’t get to play- you arc practice partners.” The top seven did almost all the playing…I think the game of competitive life often requires maximizing the experience of the people who have the most aptitude and the most determination as learning machines. And if you want the very highest reaches of human achievement, that’s where you have to go. You do not want to choose a brain surgeon for your child by drawing straws to select one of fifty applicants, all of whom take turns doing procedures. You don’t want your airplanes designed in too egalitarian a fashion. You don’t want your Berkshire Hathaways run that way either. You want to provide a lot of playing time for your best players.”
  • [See similar ideas about avoiding moral compass in evaluating ideas from Tools of Titans.]
  • [Being a fanatic can help you persevere through a business, but it can also blind you to bad decisions. For instance, if you strongly believe healthcare should be free for everyone, it can collapse your company when a better decision violates that maxim.]

 

On Mental Models

Charlie Munger has learned a lot about the world, and he calls the main ideas from the major fields “mental models.” He stresses the importance of multidisciplinary learning and connecting the major ideas together in a latticework. Here’s a Poor Charlie’s Almanack summary of Munger’s mental models.

 

Latticework of Mental Models

  • “You can’t really know anything if you just remember isolated facts and try and bang ’em back. If the facts don’t hang together on a latticework of theory, you don’t have them in a usable form. You’ve got to have models in your head. And you’ve got to array your experience—both vicarious and direct- on this latticework of models. “
  • “I’ve long believed that a certain system— which almost any intelligent person can learn— works way better than the systems that most people use. What you need is a latticework of mental models in your head. And, with that system, things gradually get to fit together in a way that enhances cognition.”
  • “The first rule is that you’ve got to have multiple models —because if you have just one or two that you’re using, the nature of human psychology is such that you’ll torture reality so that it fits your models, or at least you’ll think it does. And the models have to come from multiple disciplines—because all the wisdom of the world is not to be found in one little academic department.That’s why poetry professors, by and large, are so unwise in a worldly sense.”
  • His models supply the analytical structure that enables him to reduce the inherent chaos and confusion of a complex investment problem into a clarified set of fundamentals.
  • “Especially big forces often come out of these one hundred models. When several models combine, you get lollapalooza effects; this is when two, three, or four forces are all operating in the same direction. And, frequently, you don’t get simple addition. It’s often like a critical mass in physics where you get a nuclear explosion if you get to a certain point of mass— and you don’t get anything much worth seeing if you don’t reach the mass. Sometimes the forces just add like ordinary’ quantities and sometimes they combine on a breakpoint or critical-mass basis.”
  • “Personally, I’ve gotten so that I now use a kind of two-track analysis. First, what are the factors that really govern the interests involved, rationally considered? And second, what are the subconscious influences where the brain at a subconscious level is automatically forming conclusions in various ways— which, by and large, are useful— but which often malfunction?One approach is rationality— the way you’d work out a bridge problem, by evaluating the real interest, the real probabilities, and so forth. And the other is to evaluate the psychological factors that cause subconscious conclusions— many of which are wrong. ”
  • On math: “people can’t naturally and automatically do this. If you understand elementary psychology, the reason they can’t is really quite simple: The basic neural network of the brain is there through broad genetic and cultural evolution. And it’s not Fermat/Pascal. It uses a very crude, shortcut-type of approximation. So you have to learn in a very usable way this very elementary math and use it routinely in life—just the way if you want to become a golfer, you can’t use the natural swing that broad evolution gave you. You have to learn to have a certain grip and swing in a different way to realize your full potential as a golfer.”
  • Get the guts without the details
    • “I’m not sure that I can even pronounce the Gaussian distribution, although I know what it looks like and I know that events and huge aspects of reality end up distributed that way. So I can do a rough calculation. But if you ask me to work out something involving a Gaussian distribution to ten decimal points, I can’t sit down and do the math. I’m like a poker player who’s learned to play pretty well without mastering Pascal.”
    • “You don’t have to know it all.Just take in the best big ideas from all these disciplines.”
  • Ignore jurisdictional boundaries
    • “I urge a multidisciplinary approach—that you’ve got to have the main models from a broad array of disciplines and you’ve got to use them all—I’m really asking you to ignore jurisdictional boundaries.”
    • “Some of the worst dysfunctions in businesses come from the fact that they balkanize reality into little individual departments with territoriality and turf protection and so forth. So if you want to be a good thinker, you must develop a mind that can jump the jurisdictional boundaries.”
  • [when criticized for getting rid of calculators] “Well, I am like a guy who is prospecting for gold along the banks of the Sacramento River in 1849. With a little intelligence, I can reach down and pick up big nuggets of gold. And as long as I can do that, I’m not going to let any people in my department waste scarce resources in placer mining.” – Thomas Hunt Morgan. [Charlie’s point is that in economics, there is man-with-a-hammer syndrome, where they look only for concepts that can be neatly defined in numbers, but there is much more interesting and powerful stuff when combining multiple disciplines.]

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Mental Models Suggested

These are mental models suggested directly in Poor Charlie’s Almanack. It’s not a complete set of mental models you should know, but is a good start to build off of.

  • General
    • 2nd, 3rdorder effects
  • Math
    • Numbers, quantities, basic arithmetic
    • Compound interest
    • Permutations and combinations
    • Accounting
    • Decision Trees
    • Gaussian distribution
  • Psychology
    • Incentive-caused bias
    • Hammer-and-nail bias
    • Appealing to person’s self-interest
    • Consistency principle
    • Social proof
    • Sunk cost
    • Deprival super-reaction
    • First conclusion bias
    • Crowd folly
    • Reciprocity
    • Five Ws – Who, What, Where, When, Why
  • Engineering
    • Backup system
    • Breakpoints
    • Margin of safety
  • Physics
    • Critical mass
    • Autocatalysis
    • Equilibrium
  • Economics
    • Free market economy is an ecosystem where specializers can occupy a niche
    • Advantages of scale
    • Disadvantages of scale
    • Balances of advantages and disadvantages
    • Wealth effect
    • Opportunity cost
    • Incentives
    • Tragedy of the commons
    • Comparative advantage in trade
    • Specialization
  • Markets
    • Technology can help or kill you
    • Competitive destruction with technology
    • Pari-mutuel system
    • Mr Market
    • A stock is a piece of business
    • Margin of safety
    • Cancer surgery formula
      • Cut out everything in a business that doesn’t work, and you’re left with something that does.
    • Management
      • Checklists
      • Big “no-brainer” questions
      • Patents and trademarks
    • Biology
      • Natural selection
      • Feedback loops
    • Statistics
    • Philosophy
    • History

 

On Pros and Cons of Scale

  • Advantages
    • “The very nature of things is that if you get a whole lot of volume through your operation, you get better at processing that volume.”
    • Efficient complex processes = difficult moat
    • Winner-takes-all aspects
      • Flywheel effects of size
        • Large newspapers get most of the circulation, which drives most of the advertising, which drives more circulation.
      • Surmounts barriers to entry – eg nationwide brand advertising gives big brands a tailwind
      • Social proof
    • Disadvantages of Scale
      • Inability to specialize and explore niches, and be efficient at that specialization
      • Bureaucracy
        • The delivery of value is unclear, so people shuffle work from one to another
        • Slow to make decisions
        • Corruption – I won’t bother you if you won’t bother me
      • “The concept of a chain store was a fascinating invention. You get this huge purchasing power—which means that you have lower merchandise costs. You get a whole bunch of little laboratories out there in which you can conduct experiments. And you get specialization. If one little guy is trying to buy across twenty-seven different merchandise categories influenced by traveling salesmen, he’s going to make a lot of dumb decisions. But if your buying is done in headquarters for a huge bunch of stores, you can get very bright people that know a lot about refrigerators and so forth to do the buying. The reverse is demonstrated by the little store where one guy is doing all the buying. It’s like the old story about the little store with salt all over its walls. And a stranger comes in and says to the store owner, “You must sell a lot of salt.” And he replies, “No, I don’t. But you should see the guy who sells me salt.”

 

Top of Form

Bottom of Form

 

The Importance of Psychology and Bad Decision making

  • “The perceptual apparatus of man has shortcuts in it. The brain cannot have unlimited circuitry. So someone who knows how to take advantage of those shortcuts and cause the brain to miscalculate in certain ways can cause you to see things that aren’t there. So when circumstances combine in certain ways – or more commonly, your fellow man starts acting like the magician and manipulates you on purpose by causing you cognitive dysfunction—you’re a patsy.”
  • [Read more about Charlie Munger’s complete set of psychological biases.]

 

Autocatalysis

  • “Disney is an amazing example of autocatalysis. They had all those movies in the can. They owned the copyright. And just as Coke could prosper when refrigeration came, when the videocassettes was invented, Disney didn’t have to invent anything or do anything except take the thing out of the can and stick it on the cassette. And every parent and grandparent wanted his descendants to sit around and watch that stuff at home on videocassette. So Disney got this enormous tail wind from life. And it was billions of dollars worth of tail wind. Obviously, that’s a marvellous model if you can find it. You don’t have to invent anything. All you have to do is to sit there while the world carries you forward…”

 

Second, Third-order Effects

  • Forecasting costs and ignoring incentives
    • “Extreme economic ignorance was displayed when various experts, including Ph.D. economists, forecast the cost of the original Medicare law. They did simple extrapolations of past costs.”
    • “Well, the cost forecast was off by a factor of more than one thousand percent. The cost they projected was less than ten percent of the cost that happened. Once they put in place various new incentives, the behavior changed in response to the incentives, and the numbers became quite different from their projection. And medicine invented new and expensive remedies, as it was sure to do. I low could a great group of experts make such a silly forecast? Answer: They oversimplified to get easy figures, like the rube rounding pi to 3.2! They chose not to consider effects of effects on effects, and so on.”
  • Supporting China
    • “But suppose you’ve got a very talented ethnic group, like the Chinese, and they’re very poor and backward, and you’re an advanced nation, and you create free trade with China, and it goes on for a long time.
    • “Now let’s follow second- and third-order consequences. You are more prosperous than you would have been if you hadn’t traded with China in terms of average well¬ being in the United States, right? Ricardo proved it. But which nation is going to be growing faster in economic terms? It’s obviously China. They’re absorbing all the modern technology of the world through this great facilitator in free trade, and, like the Asian Tigers have proved, they will get ahead fast. Look at Hong Kong. Look at Taiwan. Look at early Japan. So, you start in a place where you’ve got a weak nation of backward peasants, a billion and a quarter of them, and, in the end, they’re going to be a much bigger, stronger nation than you are, maybe even having more and better atomic bombs. Well, Ricardo did not prove that that’s a wonderful outcome for the former leading nation. He didn’t try to determine second-order and higher-order effects.
    • “If you try and talk like this to economics professors, and I’ve done this three times, they shrink in horror and offense because they don’t like this kind of talk. It really gums up this nice discipline of theirs, which is so much simpler when you ignore second- and third-order consequences.
    • “The best answer I ever got on that subject—in three tries- was from George Shultz. He said, “Charlie, the way I figure it is if we stop trading with China, the other advanced nations will do it anyway, and we wouldn’t stop the ascent of China compared to us, and we’d lose the Ricardo-diagnosed advantages of trade.” Which is obviously correct. And I said, “Well, George, you’ve just invented a new form of the tragedy of the commons. You’re locked in this system, and you can’t fix it.”

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